PeopleSoft upbeat on Q3 revenue

Shares decline following sharp gains last week

By

MichaelPaige

LOS ANGELES (CBS.MW) - PeopleSoft on Monday issued an upbeat outlook for the third quarter, predicting sales will come in ahead of Wall Street estimates, but its shares lost ground following their sharp rise in the previous session.

The corporate software maker
PSFT, -8.70%
which is the target of a long-running hostile bid from Oracle Corp.
ORCL, +0.66%
forecast earnings before one-time items would meet analysts' estimates calling for a drop of more than 17 percent.

The Pleasanton, Calif., company's shares lost 63 cents, or 2.8 percent, to close at $22.20. On Friday, the stock jumped 15 percent after the company ousted its chief executive and the Department of Justice dropped efforts to block a takeover bid from Oracle, of Redwood City, Calif. See related story.

While First Albany analyst Mark Murphy said the removal of Craig Conway as CEO, and better-than-expected quarterly results were "very positive" announcements, he downgraded the stock, citing the sharp rise since mid-August.

Murphy cut his stance on PeopleSoft shares to "neutral" from a "buy" rating. "We would sell into any strength that may carry the shares toward the high $20s," he said.

The shares have risen around 30 percent in the past 60 days.

PeopleSoft forecast third-quarter revenue of $680 million to $695 million, topping the average of analysts' expectations that calls for revenue to rise 5 percent from a year ago to $655 million, according to a Thomson First Call survey.

The company predicted license revenue, a key measure of the health of corporate software makers, of $155 million to $165 million for the period. PeopleSoft expects to post net earnings of 3 or 4 cents a share for the quarter, with earnings, before one-time items, of 13 cents to 14 cents per share.

Analysts surveyed by Thomson First Call, on average, expect the company to post earnings of 14 cents a share, excluding unusual items.

"We're entering the fourth quarter with a healthy pipeline and a company that continues to prove it can execute," Kevin Parker, co-president and chief financial officer, said.

No white knight bid from Microsoft

Elsewhere, Steve Ballmer, CEO of Microsoft
MSFT, +2.11%
told the Financial Times that the world's biggest software company isn't interested in making a "white knight" bid for PeopleSoft.

Ballmer also told the FT that German software maker SAP
SAP, +0.11%
isn't "on the radar screen", but "one should never say never."

At the start of the antitrust trial surrounding Oracle's $7.7 billion bid for PeopleSoft, Redmond, Wash.-based Microsoft and SAP revealed they had held merger talks. The companies abandon the talks due to the complexities of any potential combination.

Will Oracle raise its bid?

PiperJaffray analyst Tad Piper told clients that he doesn't necessarily believe Conway's ouster paves the way for negotiations with Oracle.

Piper lifted his price target on the stock to $25 from $23, based on the company's fundamentals. He maintained his "outperform" rating.

First Albany's Murphy said that it is still possible Oracle could raise its bid for PeopleSoft toward $26 a share. However, Murphy believes the shares have reached fair value at current levels and "most of the stock's move has been made," he said.

Oracle's bid stands at $21 a share.

The better-than-anticipated third-quarter sales outlook and PeopleSoft's new management bolster its fundamental outlook, and should improve its negotiating position towards obtaining a higher bid from Oracle, according to Robert Baird's Patrick Snell.

Snell increased his target price on the shares to $24 from $21.

In the previous session, both PeopleSoft and Oracle shares made solid gains as investors bet that the executive shakeup and the abandoned Justice Department appeal could make a deal more likely. See full story.

However, analyst Donovan Gow at American Technology Research remained unconvinced that Conway's removal should be taken as a sign that the company is ready to sit down at the bargaining table with Oracle.

"Barring a major increase in Oracle's bid, we see little upside in the stock [of PeopleSoft] but increasing risk if PeopleSoft can convince shareholders that fundamentals are improving and they should not tender their shares to Oracle," Gow said.

Prudential Securities' Brent Thill remains among those who expect Oracle will be able to secure PeopleSoft, "thus strengthening its struggling apps [application software] business, while SAP continues to widen its market share," he said.

Oracle's shares dipped 3 cents, or 0.25 percent, to end the session at $11.87. The stock gained 5.5 percent in the previous session.

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